Crayon, In response to a couple of your questions/comments: 1. The image I posted was from Quikstrike.net, an application for futures options only. If you're just getting started with stock options, you might try the options calculators and HV/IV charts on the CBOE and OIC (OptionsEducation.org) sites. Those calcs and graphs are from ivolatility.com, which is a low cost resource (and I think it's a decent one, but I recommend a free trial or a one-month purchase so they turn off the annoying ads). 2. A graphing calculator is nice, but you don't need one to 'shock' your potential position. A basic Black-Scholes calculator will be fine to adjust the time, stock price and volatility inputs. These days, free graphing software isn't hard to come by at retail-focused brokerages. 3. I can't speak for Maverick, but if he seemed short with you, maybe it's because he's addressed the same line of inquiry many times over the years. In my limited time on this site, people sometimes have the idea that theta is magical and option selling is a sure fire winner. If you wade through some of the threads (and with experience), you'll learn otherwise. You might pick up some ideas about how to better formulate a strategy, even if it's "DON'T DO THIS" -- there are a few threads that include fantasic blow-ups by people selling way too many OTM options in a single or a few underylings. 4. Re the idea of selling options on large companies unlikely to have a 30% to 50% drop -- of course, it's possible and some people do just that. But remember two things: 1) 2008 when the bluest of blue chips tumbled, and 2) that many of these companies are going to have low implied volatility, making option selling an even higher risk, lower return endeavor. 5. Be careful with the whole "If I get put a stock, I'm getting something at a discount that I wanted to buy anyway" thing. It sounds good in theory, but when events change and you're short puts and taking heat on a lot of them, the furthest thing from your mind will be what a wonderful discount you're about to get. You just want to manage your position, make sure you have enough margin, and don't lose too much money. Sooner or later, you WILL have days like this.
If your new to option selling, learn your greeks and keep it simple. I am learning myself from much of the OP's recently. I think a nice range to get used to selling options is around 20-30 delta. Mind you , it makes for a volatile PnL so you have to size small and it is dependent on your directional trading and volatility forecasting skills. However, it is mentioned that some higher order greeks come into play that can make these meaty options less risky over time.....at least faster than ATM or those penny options that your selling.
Unlike a proper insurance businss, you can't diversify away all of your risk - systematic market risk will still be there. If all stocks tumble like in 2011 or 2008 (or many times before that), you will be in trouble.
Your strategy is viable 99% of the time, but 1% of the time you loose 110%. Even with a milder hiccup in the market, if your just selling premium...it can make for a very bad month. Early in my trading career, I was selling puts and calls thinking I was delta hedged. Well after some head scratching about my PL volatility, I realized I my aggregate position was just one big Iron Condor, short volatility all the way. Could have just shorted one contract, VXX or VIX futures and called it a day. So, a diversification of strategies is very good (healthy). Not only expressing your bullish / bearish view on various stocks, but also your volatility expectations.
well, as long as you're trading within your means its okay isn't ? Worst case scenario is you get stocks put to you, whereby you can sell covered calls on them. In the 2008 crashes, the market tanked but it wasn't more than 50% i believe. or maybe just a tad over 50%. That being said, If you sold OTM options that were 30% OTM, you were still better off than the people at the top. You could also sell covered calls on your position or even average down slowly to come to where your position would only be 10-15% down after the year and will be in a good position for when the market re-enters the bull market. From my understanding, there are certain strategies that work best in bull and bear markets, so once you Identify the beginning of the bull or bear, you just pick the strategy accordingly. That being said, I'm still learning. If you guys have any suggestions for good reads and such let me know! I also don't think options are as cut and dry as just trading volatility. you still need to judge sentiment, technicals, and the fundamentals of the underlying.
By delta you're referring to the expected move of an option based on a dollar increase of the underlying? So delta 20 would be equivalent to a 20 cent move in an option? Right now I have no sources of a data or IV other than cboe. lol. not willing to shell out the extra cash if i don't know how to effectively use it.
I guess if you can some how hedge for that 1% , your strategy would be viable 100%. Or maybe make that 1% a time when you break even on your trade? Also is anyone doing the following: 30-56 days to expire example stock abc currently at 9.36 sell OTM Put 8.00 for 0.3 sell OTM call 11.00 for 0.3 net profit 60$. to hedge have limit order to sell (short) ABC at 7.95 (just below strike 8.00) have limit order to buy ABC at 11.05 (just above or below 11.00 strike) net profit of $55 as long as your orders get filled. I guess the only risk I can see is a gap up or gap down in the After market hours. What do you guys think?
I've been using this strategy for a while now. Some things I learned: 1) Don't exceed 10-15% of your available capital for maintenance margin. 2) Try to sell when IV is high. In stocks this happens usually after a big drop, but in commodities it is often the opposite. One thing that often helps with futures is that exchanges will raise margin requirements when IV jumps high, which affects futures, but not futures options. 3) Make sure you know the market you trade and you have a good fundamental justification for the direction you trade, don't go based only technical analysis. Regarding comments that one day you might get blown to pieces - that can happen with ANY trading strategy.